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New IRS Regulations Simplify Reinstatement of Revoked Tax-Exempt Status

On January 2, 2014, the IRS released a new Revenue Procedure that serves as a huge help for many small nonprofits who previously had their tax-exempt status revoked for failing to file tax returns for three consecutive years.

In 2006, there was a change in law that required all exempt organizations (except churches) to file annual returns regardless of how small their annual receipts were. If the organizations failed to file tax returns for three consecutive years, their tax-exempt status was automatically revoked. Unfortunately, many smaller organizations were unaware of this change, and as a result, hundreds of thousands of entities failed to file returns for three years and consequently had their tax-exempt statuses automatically revoked. The law change also caused problems for the IRS: it did not have enough personnel to process all of the new requests from organizations that were reapplying, nor did it have sufficient guidance as to whether it should retroactively reinstate the organization’s tax-exempt status. The lapse in tax-exempt status created significant problems, including subjecting the entity to corporate income taxes at the federal and state level.

In order to resolve these issues and streamline the reinstatement process, the IRS recently implemented Revenue Procedure 2014-11. This new regulation allows organizations to retroactively reinstate their tax-exempt status, which avoids any gap in the organization’s tax-exempt status. As a result, the organization avoids having to pay taxes mentioned above and avoids having to file returns as a taxable organization for the interim period between revocation and reinstatement.

The most streamlined process in the new Revenue Procedure applies to “small” nonprofits—those eligible to file Form 990-EZ or Form 990-N. Organizations with annual gross receipts below $200,000 and total year-end asset value below $500,000 may file the Form 990-EZ, and organizations with annual receipts of $50,000 or less may file the Form 990-N. These “small” nonprofits can apply for retroactive reinstatement by filing a new Form 1023 as well as the Forms 990-EZ for the missed years. If the nonprofit was eligible to file Form 990-N for any or all of the missed years, it does not have to file the Form(s) in arrears. Significantly, the IRS will not assume the organization had reasonable cause for failing to file returns for the missed years, so the organization does not need to provide a separate written submission demonstrating reasonable cause. Further, the IRS will abate any late filing penalties incurred for the Forms 990-EZ for the missed years.

The new regulation does include a time limit: any organization seeking to reinstate its tax-exempt status must apply within 15 months of its revocation. If an organization misses the 15-month deadline, it must affirmatively demonstrate that it had reasonable cause for failing to file returns in order to have its tax-exempt status retroactively restored.

If you have an organization whose tax-exempt status was recently revoked, feel free to contact the attorneys at Dalton & Tomich to discuss the new Revenue Procedure and whether it benefits your organization.

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